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Monday, 8 February 2010

Money for nothing (part 2)… Years’ of unprecedented success for no gain

In my last post, I showed how the £109m of revenue gained from higher ticket prices and the opening of the quadrants had gone not to the club but to pay a “Glazer tax”. The tax is made up of the cash interest costs from the bank debt (now replaced by bond debt) and the “management fees”, “consultancy fees” and loans paid to the Glazer family. From the takeover to June 2009 this tax totalled £194m (and this takes no account of the PIKs, professional fees and the losses on the interest rate derivative).

In this post we’ll look at the other enormous financial windfall the club should have benefited from, the extra media income generated not by the men (and woman) from Miami, but by the men in red shirts, by Sir Alex Ferguson and his staff.

Last season was almost perfect on the pitch. Except for an unlucky FA Cup exit on the ploughed field that passes for our national stadium (I wouldn’t let the FA run my bath) and a warm night in Rome when we got taught a lesson, the team did us proud again. With the exception of not being in the FA Cup final, United couldn’t really have had any more competitive televised games than they did in 2008/09. And its televised games and progressing through competitions that brings in media income. Last season was a good one, and United have had three good seasons out of four since the takeover (this is not something we should shy away from saying, we could have achieved all this and more without our owners). The exception was of course 2005/06 when a Carling Cup trophy was not adequate compensation for coming last in our Champions League Group and eight pounds behind Chelsea in the league.

So how much money has our success brought in?

This is difficult to answer precisely, because there is no definitive benchmark. To deal with this, I suggest that “success” is defined as the extra media money United gets compared to a theoretical season when we:

1.Come fourth in the Premier League

2.Perform as we did in the Champions League in 2005/06

3.Only play one televised FA Cup game and lose (hmmmm)

4.Play no televised League Cup games and get knocked out in the 4th round

We are always told that Champions League qualification is the minimum we should aspire to and it underpins the Glazers’ business model so as a benchmark, the above scenario looks reasonable. Rather than trying to track the changes in TV contracts and prize money since 2005, we’ll look at the actual income in 2008/09 and compare it to what we would have earned in the “4th place” scenario to see what percentage of the club’s media income has been driven by the team's amazing outperformance.

The real 2008/09

United’s total media revenue last season was £99.7m of which £86.5m came from the four major competitions (the rest is MUTV, MU Interactive and other in-house media rights all of which broke even and are of no relevance to this analysis).

Premier League 2008/09

Domestic TV money from the Premier League, after various deductions, is distributed partially on an equal basis to each club (“the basic award fund” which also includes parachute payments to relegated clubs), partially on the basis of final league position (the “merit award pool”) and partially on the basis of how many televised games a club plays (the “facility fees fund”). In addition, overseas income is split equally between the clubs. Here is United’s income for the season and what the club would have received if it had come fourth (using Arsenal’s income for last season):

Premier League

% total net

United %

Total £m

United £m

4th place using Arsenal no.s

Basic fund

50%

5.0%

298.9

13.9

13.9

Merit fund

25%

10.0%

149.4

15.2

12.1

Facilities Fund

25%

8.0%

149.4

12.7

11.6

Domestic

7.0%

597.7

41.8

37.6

Overseas

5.0%

206.4

9.6

9.6

Total 2008/09

6.0%

804.1

51.4

47.2

Champions League 2008/09

Participants in the group stages of the Champions League received a fixed €5.4m. For every group stage drawn game there was a payment of €300,000 with €600,000 for a win. Qualifying for the group stage brought in a further €2.2m and so on (see table below). There is also a large “market pool” payment determined by which country a club is from, how clubs from that country perform and how a club performs relative to its peers from the country (this can throw up some strange anomalies; because the German pool is bigger than the Spanish pool, Bayern Munich actually made more money from the Champions League in 2009 than Barcelona).

If United had gone out in the same style as we did in 2005/06, the impact on TV revenue would be huge (see below). I have assumed a “pool” payment of 50% of what was actually achieved.

€m

United 08/09 €m

Using 05/06 €m

Qualifying for group stage

3.0

3.0

3.0

Per group game

0.4

2.4

2.4

Each group stage win

0.6

1.2

0.6

Each group stage draw

0.3

1.2

0.9

Group stage qualification

2.2

2.2

0.0

QF qualification

2.5

2.5

0.0

SF qualification

3.0

3.0

0.0

Losing finalist

4.0

4.0

0.0

Winning finalist

7.0

0.0

0.0

Market pool payments

18.8

9.4

Total

38.3

16.3

FA Cup and Carling Cup

The Carling Cup brings in virtually no TV revenue even if a team wins it! In 2008/09 United won the cup and earned £300,000 including prize money. The FA Cup is more lucrative (although clubs earn no TV revenue from semi-finals or finals). In 2008/09 United earned £900,000 from TV income and £1.3m in prize money from being a losing semi finalist.

A “4th place” 2008/09

So how much less would United have earned if we’d suffered the doom laden scenario I outline above? The table below shows the outcome:

Actual

"4th place" scenario

PL

51.4

47.2

FAC

2.2

0.2

CC

0.2

0.0

Domestic

53.8

47.4

CL €

38.3

16.9

CL £

32.7

14.4

Total collective

86.5

61.8

MUTV

8.0

8.0

MU Interactive

1.7

1.7

Other

3.5

3.5

Media

99.7

75.0

As you can see, the team’s success last year brought in just under £25m more than it would have been in my scenario, 25% of the total.

The fruits of success

In the last three seasons, United have been in two CL finals, reaching the semi-finals in the other year, have reached one FA Cup Final, one semi-final and one quarter-final and won the Carling Cup in 2008/09.

In financial terms, I believe it is reasonable to conclude that around 25% of United’s media income in those seasons can be put down to the incredible work of the playing squad, the 2005/06 season was a poor.

So taking all the media income the club has earned since the takeover, a total of £235m, £63m has come from beating the “4th place” benchmark. In a world without the Glazers, this huge extra income could have been reinvested in the club, but with our owners, the Glazer tax has to be paid first. So we can add the £63m to the £109m of “extra” matchday income they have wasted. That’s £172m of the £194m in interest and fees accounted for.

All that success, all that extra money, and absolutely none of it for the club’s benefit. We can’t go on like this.